Svansong

BP: Well that went well. Carl-Henric Svanberg’s crunch meeting with President Barack Obama has concluded with the BP chairman agreeing to the UK oil major putting $20 billion in escrow to cover claims from the Gulf of Mexico disaster. BP has also bowed to pressure to defer the dividend. The shares have reacted positively — evidence of just how badly the market thought this awkward summit would end.

BP is paying the price not just for polluting the Louisiana coastline, but for failing to take the initiative sooner. Had it made an unsolicited announcement that shareholders would receive no dividends while the well was gushing, Obama might not have become so fixated on BP’s ability to pay damages. Instead, the board dithered. In the meantime, Obama has effectively taken control. True, it’s hard to imagine how Svanberg could have got the better of the president. The hope was that he might be able to agree to a smaller escrow with maybe some modest dividend allowed in return. In the end, Obama is effectively taking $20 billion from BP and telling someone else how to spend it. Once a fund is set up with a designated sum, the chances of BP shareholders seeing the money again are remote.

Champions of free markets will bleat that Obama’s move is tantamount to state confiscation of private assets, the sort of thing seen only in emerging markets. But, oil is an inherently politicised sector everywhere. Investors are now learning what “political risk” means.

The consolation for BP is that the man charged with overseeing how the fund is spent, Ken Feinberg, earned a reputation for straight dealing when he oversaw 9/11 compensation. His appointment should soften fears about the fund paying out spurious claims. To the extent that this fund provides certainty, it puts a floor rather than a ceiling on the costs of this disaster.

Indeed, BP says the “fund does not represent a cap on BP liabilities.” Financially, it’s swallowable, especially as the money is deposited over three and a half years. BP has about $15 billion of cash and committed bank lines. Ongoing cash generation and the dividend suspension can fund the balance. BP also plans to reduce capital expenditure and sell $10 billion of assets in the next 12 months.

BP could arguably have avoided this whipping had it moved quicker. The hope now must be that by caving in to Obama, the public drudging abates. We’ll see.